Posted by: Josh Lehner | May 15, 2019

Economic and Revenue Forecast, May 2019

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The economy is on firmer ground today following a rocky start to the year. The combination of softer economic data and concerns over potential policy mistakes raised the risk of recession. However as the data flow improves, and the Federal Reserve’s dovish pivot, recession fears have faded. That said the economy is slowing down following last year’s tax cut fueled growth. Economic gains over the upcoming 2019-21 biennium will be more in-line with underlying growth in the labor force and productivity. Encouragingly, the latter has shown signs of life recently due to the tighter labor market. The recent escalation in the trade war is a wildcard. It is too soon to know how disruptive it may be to global supply chains as developments are ongoing.

While the U.S. economy is just now beginning to slow, Oregon’s has for the past few years. Now, the state continues to see healthy rates of growth. However Oregon is no longer significantly outpacing the nation like it was a couple of years ago. Overall, this was not unexpected. So far this biennium, actual employment, personal income, and population in Oregon have closely tracked the forecast.

Looking forward, Oregon’s economic outlook calls for ongoing, but slower growth this year and next. The tighter labor market, somewhat fewer in-migrants, fading federal fiscal stimulus and past interest rate hikes all cool economic activity. That said, Oregon continues to hit the sweet spot. Growth is strong enough to keep up with a growing population but also deliver economic and income gains to Oregonians. This pattern is expected to continue until the next recession, whenever it comes.

While economic growth in Oregon is slowing down as expected, the same cannot be said for our General Fund tax revenues.  During the peak tax filing season, Oregon saw record collections of both personal and corporate income taxes. Both are up more than 50% relative to this time last year. Now, most other states that depend on income taxes have also experienced very big years. However, tax collections have come in far above what underlying economic gains could reasonably support.

Clearly, taxpayer responses to federal tax reform are playing a large role in these record collections. Law changes have broadened the tax base for some business income, and have given taxpayers the incentive to shift the timing of their payments.  With lower tax rates in 2018, filers tried to recognize as much income as possible during the tax year. How much liability remains to be realized in future years is an open question.

Projected 2017-19 Net General Fund resources are up $883 million from the May 2019 forecast.  Including Lottery revenues, net resources are up $908 million.  As a result, Oregon’s unique kicker law has been triggered for both personal and corporate taxes.  A record (in dollar terms) $1.4 billion personal kicker is projected for 2019-21, while corporate tax revenue of $616 million is projected to be dedicated to K-12 education spending.

Given Oregon’s economic and revenue forecast history, kicker payments of this size are a once a decade event. The median filer will receive a kicker credit of $338 next year, while the average filer will receive a credit of $691.  Filers in the top 1% of the income distribution will receive a credit of nearly $14,000.

Heading into the next biennium, uncertainty about the performance of the regional economy will become paramount.  Growth will certainly slow to a more sustainable rate in the coming years, but the path taken to get there is unknown.  Capacity constraints, an aging workforce, monetary policy drags and fading stimulus all put a lid on growth a couple of years down the road.  However, the exact timing and steepness of this deceleration is difficult to predict, leading to a wide range of possible revenue outcomes for the 2019-21 biennium. 

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | May 8, 2019

Labor Supply Update and Thoughts on the Outlook

As Oregon’s labor market continues to transition down to more sustainable rates of growth, our office and our advisors keep coming back to the question of where the labor will come from. Obviously there are two main sources: current residents who are not working today and new residents moving into Oregon. The real question is how much labor can we reasonably expect from either group as we enter into the eleventh year of the expansion? We’re releasing our latest forecast next week, so you’ll have to wait until then to know for sure. However this post will highlight the latest data and some of the conversations we have had recently with our advisory groups.

First, the share of prime working-age Oregonians with a job today is back to where it was prior to the Great Recession, and even a bit higher. This is tremendous economic news and one big reason Oregon’s job gains have outstripped the average state. That said, job growth among this age group in the past couple of years has essentially matched population gains, meaning the employment rate has held fairly steady. And this steady employment rate is a key driver in the slower statewide job gains in recent years. This largely reflects the fact that much of the slack is gone. There is no longer an army of unemployed Oregonians waiting around for a job. Firms must cast a wider net in recruitment and dig deeper into their resume stack to fill open positions. (Note that the Oregon data is based on a smaller sample size and can be noisy.)

Steady prime-age EPOP suggests job growth moving forward will be more closely tied to the underlying gains seen in the population. Now, there does remain some room for further improvements as the employment rates were higher back in 1999 and 2000, or the peak of the technology-led expansion. Regaining such employment rates would keep Oregon’s job growth stronger, for longer, and mark further economic improvements. However, even regaining the 2000 rates of employment would not likely alter our baseline forecast too much given the aging demographics, increasing retirements, slowing migration patterns and the like. That said, economically, we would love to see further gains in EPOP and as the expansion continues, we likely will to some degree.

Previously, our office dug into 3 potential pools of underutilized workers which should they return to the workforce in greater numbers, would push Oregon job growth rates higher. These groups include: teenagers, stay-at-home moms, and those with self-reported disabilities.

Second, population growth, and migration specifically, slows in a mature expansion. People follow the jobs. 60% of new Oregon residents say they moved here for a job or in search of work. So as job growth slows, so too will migration. This slowdown has been built into our office’s forecast for some time now. However the exact year-to-year changes can be noisy and hard to predict. Overall our office’s population forecast has been raised relative to a few years ago due to stronger-than-expected migration in 2016 and 2017. That said, population growth in 2018 was a noticeable step down relative to recent years. A sharper deceleration than expected. But what is very clear in the data is how widespread this slowdown was last year. (Note the following charts are based on data from our friends at Portland State’s Population Research Center, who provide the official state estimates between each decennial Census. The Census Bureau has its own set of Oregon estimates.)

Slower gains were seen across age groups. The exception being older cohorts for the most part which is about Baby Boomers aging from their 50s into their 60s and 70s, and not about retiree migration which is small. Also, the number of children in Oregon is largely holding steady or declining somewhat. As promised before, I will come back to the birthrate issue at some point in the near future.

The slower population growth was also seen across all regions of the state. Even Bend is slowing some.

Additionally, given that underlying working-age population growth is a key determinant in labor supply and the economic outlook, our office recently dug into expectations for county level growth in the 2020s.

Bottom Line: Job growth in Oregon has been slowing down to more sustainable rates in recent years and is expected to continue to do so. Eventually, once all of the slack is gone from the economy, job growth will match population gains. This has been the nature of our outlook for some time. The tricky part is figuring out how long and to what degree this transition takes place. There is still room to run for this economic expansion and the longer it lasts the more progress we should see. Our office will release a new forecast next Wednesday and this, being the May forecast in an odd year, will also set the revenue bar for the 2019-21 BN budget and form the basis of any future kicker calculations.

Posted by: Josh Lehner | May 2, 2019

Lifting the Hood on Oregon’s Transfer Payments

Over the past decade or two, transfer payments have become a larger source of personal income here in Oregon and across the country. Transfer payments are basically benefits paid for by the government for citizens who are generally either older (Social Security) or low-income (SNAP, Medicaid, Unemployment Insurance, etc). As such, this rise in transfer payments can be considered relatively benign — an aging population means more Social Security benefits paid out — or a signal of deeper economic problems — more residents in need of financial assistance. The fact that transfer payments account for a larger share of all income in Oregon than nationwide warrants a bit of further digging to see if we can spot some key issues.

In examining the types of transfer payments that the BEA tracks in their personal income data, it becomes quite clear what is driving Oregon’s higher share. Social Security and Medicaid are the key reasons for Oregon’s higher share of transfer payments. For Social Security, this largely reflects Oregon’s extra large Baby Boomer cohort. Our population 65 years and older is roughly 10% larger than nationwide, in proportion of our overall population. For Medicaid, the timing lines up with the Affordable Care Act and expansion of Medicaid. Prior to the ACA, medicaid composed about the same percentage of income in Oregon as it did nationwide. Following the Medicaid expansion, Oregon’s share has been higher. This gap reflects the fact that some states chose not to expand coverage to their residents.

What this also means is that other needs-based programs are not comprising a larger share of Oregon income than they are nationally. Programs like EITC, SNAP, SSI, TANF and WIC which are targeted to assist our low-income neighbors are not significantly larger here in Oregon than nationwide, at least when measuring the dollar values against the size of the local economy. Now, one item where Oregon does tend to see higher spending is from Unemployment Insurance. There is not much of a difference today given we are in a strong labor market, but during recessions, when Oregon loses more jobs and has a higher unemployment rate, we do pay out more unemployment benefits than the typical state. This gap widens in downturns and shrinks in expansions.

At the regional level, Oregon sees considerable variation in transfer payments. As shown below, they’re increasing in all parts of the state, but particularly so in our rural areas. This increase is in large part due to the slower economic gains experienced in recent decades — meaning transfer payments are a larger share given fewer wages and less business income — in addition to older demographics which include some younger workers moving to urban areas and some retiree in-migration. All of these work to increase the relative share of transfer payments above and beyond the general aging of the overall population. (See our office’s previous look at future labor force growth across the state for more on the demographic implications for the economy.)

Do note that one caveat here is that all of the above is basing transfer payments as a share of personal income. In Oregon, while our median household incomes are now on par with the US, we do still have lower per capita personal income due to the income gap at the high-end. If Oregon’s per capita personal income were higher, then our transfer payments would be a smaller share of income and below the US, even if our caseloads remained the same.

Bottom Line: Transfer payments are an increasing source of income across the country. While this increase is seen everywhere, it is particularly pronounced in our rural communities where transfer payments today account for 1 out of every 3 dollars of personal income. However, transfer payments are not “bad” sources of income, and play a key role in many of our lives. Transfer payments provide financial assistance to our neighbors in need, hopefully temporarily while they get back on their feet, and to ensure some standard of living in old age. As such, these programs and benefits allow us to put food on the table and cover medical expenses. Much of this growth over time is due to an aging population. The fact that retirements are ramping up and the working-age population is increasing slowly does mean this higher share of transfer payments is here to stay.

Posted by: Josh Lehner | April 25, 2019

Estate Tax Update

Here is a quick, updated look at estate taxes in Oregon. This is a follow-up, as promised, to our recent work looking at the income distribution and wealth. Recent years have brought record-breaking estate tax collections that have been significantly stronger than our office’s forecasts. Along with our friends at the Department of Revenue and Legislative Revenue Office, we have been trying to better understand the drivers of this growth and to what degree it is cyclical (asset market fluctuations), structural (aging demographics), and/or temporary (just a few estates accounting for tax collections).

Overall the number of estates impacted by the tax is relatively steady over the past decade, both in absolute numbers and as a share of all Oregon deaths. Now, of course not all those filing taxes in Oregon are Oregonians, as people living outside the state can and do own businesses and/or property. But it is helpful to gauge estate tax filings in relation to demographic trends. This shows that the estate tax is not affecting a larger share of the population today than it has in the past.

If it’s not more households being impacted, that means the underlying revenue growth is coming from cyclical and/or temporary factors. However it’s a bit fuzzy in trying to decompose these impacts. As seen below, there is no question that the increasing size of a few very large estates is driving much of the revenue growth. That said, we know that asset markets and valuations are rising and we are also seeing an increased concentration of wealth. This suggests future tax collections will remain strong, at least until the next recession when asset prices fall. Now, on the flipside, given the increased concentration among a handful of estates, tax collections may be more sporadic or irregular moving forward due to the unknown timing of when someone passes away.

Additionally, despite the concern that Oregon’s relatively low $1 million threshold will ensnare more Oregonians due to the hot housing market, so far this does not appear to be the case. Recent estimates made by LendingTree, Trulia, and our office’s examination of Census data all show that the share of housing units in Oregon valued at $1 million or greater is somewhere in the 2-3% range. This is more than double the share seen in the aftermath of the housing bust, but on par with or slightly higher than the share seen at the peak of the housing bubble. This highlights the fact that while most household’s primary residence is their source of wealth, this is not the case for high net worth households. They tend to hold a variety of assets including financial investments and business equity, in addition to their home. A hot housing market may contribute to their estate valuation, but by itself is not necessarily the driver of whether or not they are subject to Oregon’s estate tax.

Finally, we do know that tax planning is a key component for high net worth households and it does impact actual collections. Based on conversations with our advisors, we do take this into account in our forecast. Our outlook for estate tax collections remains strong, however it is not quite as strong as underlying demographics and asset markets suggest due to this tax planning capabilities.

Posted by: Josh Lehner | April 17, 2019

Future Economic Growth in Oregon

Economic growth over the long run is determined by the number of workers and how productive they are. The main reason Oregon outperforms the typical state over the entire business cycle is our stronger population growth. In particular, the influx of young, skilled households boosts our economic potential as our working-age population increases faster than in much of the country.

The big economic problem today is that demographics have turned into a major headwind. First, overall population growth is as slow as we have experienced in the past hundred years. It is not expected to pick up significantly either. Second, Baby Boomer retirements mean the working-age population is growing even slower and in many places around the country it is shrinking.

Our office’s measure of the potential labor force — taking demographics and adjusting based on participation rates by age — is expected to increase in the 2020s at half the rate Oregon experienced in the 1990s and one-third the rate as back in the 1970s when the Boomers entered into the workforce. Our economy will continue to grow and outstrip the typical state. However this growth will be significantly slower than we have become accustomed to. This has been the underlying character of our office’s forecasts for years as these trends directly translate into fewer job gains and slower growth in business sales and tax revenues.

Furthermore, these demographic headwinds have profound effects on nearly every economic measure we have, as is laid out in a great, new report from the Economic Innovation Group. (See Neil Irwin’s NYT article of Richard Florida’s post for good summaries.) The following quote from the report highlights the key points and issues:

The demographic decline facing large parts of the country are not benign. Demographic decline and population loss are not just symptoms of place-based economic decline, they are direct causes of it… Population loss reverberates through housing markets and municipal finances. Low-growth places have weaker labor markets and suffer from less economic dynamism.

Much of the report focuses on not just the demographic challenges, but how they vary across the nation. As the authors note, roughly half of U.S. counties lost population over the past decade and 80% lost prime working-age population (25-54 years old). Here in Oregon it is not quite as dire as “only” 3 of our 36 counties saw minor population losses during the past 10 years (Grant, Harney, Sherman). Relative to the rest of the country, these counties fall more in the middle of the distribution given the worse trends in the Northeast and Midwest. Oregon demographics as a whole are better off than much of the country. We are seeing stronger population gains and more widespread gains across the state. That said, Oregon is not immune and face the same big picture issues, albeit to a slightly less degree.

In terms of the outlook, demographics are going to get worse before they get better. Over the coming decade, according to the latest Portland State forecasts, Oregon’s counties will avoid significant population losses, although there will be some. That’s the good news. However 11 of our 36 counties will experience a shrinking potential labor force. In 2030, there will be fewer residents available for work and likely fewer workers overall in these counties. A few other counties will see no growth in their potential labor force. Overall, the number of residents available for work in every single county will increase at a slower rate than total population growth due to underlying demographics.

However, the outlook does not call for a downward spiral forever. Once we get past the bulge of upcoming retirements, the outlook improves. In particular, rural Oregon will see the biggest swings and improvements relative to recent years. This is something our office tried to highlight a few years ago.

When it comes to the demographic drag, what matters is aging from one’s 50s to one’s 70s. This is when people go from their peak-working and peak-earning years to nearly everyone being retired. Given demographic trends, including some young adults moving away to urban areas, rural communities are nearly all the way through the demographic drag. You can see this below where the growth rates all pick up considerably for the North Coast, Northeastern, and Southwestern Oregon. Even Southeastern Oregon, which faces the biggest demographic and population growth challenges, goes from losses to relative stability.

Conversely, while urban Oregon will still outpace rural areas, the state’s fastest-growing areas are set to slow down in the coming years. The inflow of new migrants will be slower as migration rates trend down and the demographic drag hits; the Gen Xers and Millennials who moved to Oregon in recent decades will get to retire someday, probably. As such, growth will taper in Central Oregon (Bend mostly) and the Portland region. Oregon’s other urban areas like the Rogue and Willamette Valleys will see relatively steady gains.

Demographics are a very powerful force. For now they are largely pointing in the wrong direction. The EIG report notes that by 2037 two-thirds of U.S. counties will have fewer prime working-age adults than they did in 1997. Here in Oregon we are not immune but are somewhat better off given migration flows. From 2000 to 2040, 14 Oregon counties will have a smaller prime working-age population and 11 of them will have a smaller potential labor force.

A slower-growing and in some places an outright smaller economy is and will be a tremendous challenge. It weighs on the workforce, housing markets, business sales, and public services. That said, if the latest population forecasts are reasonably accurate, the trends will be improving in a handful of years as we reach peak retirements.

Finally, the report dives into a lot more information (do read it) but one item it discusses in educational attainment. Our office looked at this in our Rural Oregon report as well. Now, one potentially complicating factor is the lack of an urban wage premium today for those without a college degree. It is possible that this will further alter migration and demographic patterns but it is still too early to tell if and how much.

Job polarization is the academic term for when high-wage and low-wage jobs grow quickly while good-paying, family-wage jobs bear the brunt of recessions and don’t tend to come all the way back in expansions. Now, some of these changes in the labor market are good news, like the growth in high-wage jobs which has lead statewide gains this expansion. Other changes are relatively benign, like the growth in low-wage jobs which largely serve a growing population that likes to travel and go out to eat more. However the real crux of the issue is when someone loses a middle-wage job and is unable to find another one. This is what makes job polarization so problematic for the economy in recent decades. As our previous research showed, many of the former middle-wage workers dropped out of the labor force entirely and stopped looking for work. This is a terrible outcome for individuals, for their households, and for the economy.

Today I’m not here to rehash all of the job polarization research (see HERE, HERE, HERE, and HERE for starters) but to provide an update based on the recently released 2018 occupational data. As a reminder, these big changes in the economy are best viewed through the occupational lens and not industries — which is how we typically talk about jobs — as these changes cut across all firms and are not confined to a specific industry.

From a big picture perspective, last year’s job growth in Oregon was broad-based across the different groups and similar to what we have seen in recent years. However the good news is that the total number of middle-wage jobs in the state is nearly back to pre-recession levels, although we remain a few thousand short. The population-driven middle-wage jobs, like community service workers, educators, construction workers, repair(wo)men and the like are all back to peak, or nearly so. However, the more business support type middle-wage jobs like production, transportation, and office and administrative support ones are growing again but remain fewer in number than a decade or two ago.

Digging into the data shows that some regions of the state have actually fully regained all of their middle-wage jobs, which was not true a year ago. Specifically, the Bend, Portland and Salem metro areas are now at historic highs for the number of middle-wage jobs. The gains in recent years, like the state as a whole, have been broad-based. All major occupational groups are seeing gains. However production, transportation, and office support jobs are lagging overall. (Except office support is doing quite well in Bend.) The other areas of Oregon are seeing gains as well, but have yet to fully recover their Great Recession losses.

The fact that we now have a few regions that have regained their lost middle-wage jobs, I was curious to see how widespread this was across the country. In updating the polarization data for the nation’s largest metros, I was surprised. From 2007 to 2018, 45 of the 97 metros I have data for have fully regained their middle-wage jobs. Portland’s middle-wage growth ranks 33rd best, but the gains across the nation are more widespread than I first imagined.

Now, when looking at state level data we see that very few states have regained their lost middle-wage jobs. In fact only 9 states today have more than prior to the Great Recession. Another 8 states, including Oregon, are essentially back with either a few more or a few less than a decade ago. That means 33 states are significantly lower today than before the Great Recession.

In thinking this through, these findings do fit the overall pattern of growth this expansion. The nation’s largest metro areas turned around first after the recession and have seen the strongest gains overall. Given that many middle-wage jobs are in part driven by population growth, the fact that the big cities have seen the best employment and population gains means they are also more likely to recover their middle-wage jobs. Now, many of the nation’s secondary metros and rural areas are growing again — at least here in Oregon and across the West — but their overall gains are less pronounced than the big urban centers over the past decade.

Finally, in thinking more about growth in rural areas and after giving a few presentations lately, I wanted to share an Eastern Oregon version of the job polarization chart. As I tell audiences, this pattern of job growth is seen in every single area or region that I have looked at. High-wage and low-wage job growth dominates, while middle-wage jobs lag. The main difference is urban areas see the strongest high-wage gains, even as the polarization pattern is evident everywhere. Note: Eastern Oregon here includes all counties east of the Cascades excluding Deschutes.

Speaking of rural areas, I am currently in the process of updating our potential labor force figures by county based on new population data and forecasts. Stay tuned for more on that in the coming weeks.

Posted by: Josh Lehner | April 5, 2019

Oregon Exports, Strong Dollar and Trade Tensions

The Port of Portland, in conjunction with Business Oregon and our office, just put out a press release covering the latest trends for Oregon exports. There is a lot of good nuggets of information included in the release. Do read the whole thing. Our contribution largely related to the impacts, or lack thereof, of the tariffs and strong dollar. What follows below is the summary our office pulled together as part of our latest forecast materials.

The strong U.S. dollar and ongoing trade tensions are worrisome but not yet problematic or detrimental to the Oregon economy overall. Oregon tends to rank 10th highest, or so, nationwide when it comes to the value of exports as a share of state GDP. Additionally, the economic impact is larger than this as many other states’ products ship through Oregon on their way to destinations along the Pacific Rim.

China and Canada remain the number one and two destinations for Oregon made products, respectively. Combined they account for more than one-third of all Oregon exports. And for the time being at least, there is good news for Oregon firms exporting to both markets.

First, exports to Canada have rebounded strongly in the past 18 months. These gains are driven by heavy manufacturing exports (machinery, transportation equipment, and metals) which have historically accounted for half of all Oregon products sent north. Much of the recent increases can be tied to heavy trucks.

Second, despite the ongoing trade tensions with China, Oregon exports have yet to see any declines. This is not true at the national level. However only about one-third of Oregon exports headed to China are subject to proposed or enacted tariffs. Such exports, at least for the time being, are holding steady. Importantly, many of Oregon’s top exports are not subject to tariffs and are seeing ongoing gains in trade, including electrical and industrial machinery.

Given the strong dollar and global growth, it should be expected that Oregon’s total exports will slow moving forward. This is particularly true for the state’s non-technology exports which more closely follow the business cycle and not the product development cycle of each new generation of chips. Should trade tensions rise further, and/or the dollar continues to appreciate, Oregon exports may decline outright. Exchange rates have cooled some in early 2019 following their peak in December. Our office will continue to monitor these trends to gauge their impact on the U.S. and Oregon economies.

Posted by: Josh Lehner | April 4, 2019

Oregon’s Income Distribution

Oregon’s income gains this expansion are among the best in the nation, as our office has highlighted in recent years. The state’s median household income now matches the U.S. for the first time since the mills started closing in the 1980s. The single largest factor underlying this growth is the strong labor market. For individuals and households in the middle of the distribution their primary and at times only source of income is wages. So the strong household income gains are driven by more Oregonians working more hours and at higher pay. The state’s average wage, while lower than the nation’s, is back to the same relative position as in the 1970s.

While all of these high level points have been well-covered, they do rely on medians and averages. We don’t look across the entire income distribution as often. So today I wanted to provide a few new and updated looks at the data to show how broad-based these gains have been.

First, let’s compare Oregonian household incomes across the entire distribution to their national counterparts. In the latest Census data, Oregonians in the bottom 55% (or those with incomes of $67,000 or less) have similar or higher incomes than their national counterparts. Oregonian households in the top third and particularly the top 10% have lower incomes.

Now, one major factor influencing Oregon’s per capita personal income are the relative incomes at the very top of the distribution. Make no mistake, Oregon’s highest-income households have done well financially. But even in recent years, Oregon’s Top 1% or Top 5% of households have not closed the gap with their national counterparts. This gap among the richest households is large enough, and their incomes are high enough, to weigh on Oregon’s overall per capita personal income figures even as Oregonians in the bottom two-thirds of the distribution earn similar or higher incomes.

The good news here is that Oregon has seen broad-based gains in recent years. These improvements across the entire distribution have raised Oregon’s per capita personal income to it’s highest level, relative to the U.S., since before the dotcom crash in 2001. All of this despite the ongoing gap at the top-end.

Next, given Oregon’s median household income today matches the U.S., I was curious how Oregon’s distribution looked the last time this was true, back at the 1980 Census. Same type of chart looking at Oregonians and their national counterparts across the entire distribution.

Four things stand out.

First, comparing the latest 2017 data to the last time we looked at this in 2014, you can see the broad-based gains in recent years. At all points in the distribution, Oregon’s gains have outpaced the nation’s. (Difference between gray and dark blue lines.)

Second, Oregonians in the 20th through 65th percentiles have the same exact relative positions today as back in 1980.

Third, national income gains for the lowest-income households have outpaced Oregon gains during this time, but Oregonians are still doing relatively better overall.

Fourth, the gap at the top-end of the spectrum has widened over time. As just mentioned above, this is the driver behind the per capita income trends. It is not about job growth or wages for the typical worker, but about relatively smaller gains for the very highest-income households. In part this reflects the fact that Oregon is not a financial center, nor do we have a lot of multinational headquarter operations.

Finally, I was asked recently about income gains across the distribution in the Portland region. So I crunched some Census data and you can see the changes in the past decade for a few select percentiles. As expected, higher-income households have seen the biggest gains. This reflects the fact they saw fewer losses, but also enjoy a more diverse source of income in the form of wages, capital gains, investment properties and the like. We know that non-wage income growth has outstripped wage gains in recent decades. That said, households incomes across the entire spectrum are higher today in the Portland metro than before the recession even after adjusting for inflation.

Note that the decline in incomes at the 10th percentile in 2017 are also evident in the statewide data, as well as in Eugene. For now, given the ongoing strength in the labor market, this is likely an outlier data point that will be reversed when new data is released this fall. However we do not know for sure and this is something our office is monitoring closely.

I also took a similar look at other metros in Oregon, click on the links for the corresponding charts. In Bend incomes at all points in the distribution are back to pre-recession levels. In Eugene, incomes are up although we see declines at the bottom-end in recent years. Again, likely due to noisy data, but we shall see. And in Medford, where wage and income growth has lagged, we find incomes at the top rising quickly while all other points remain lower.

In terms of the outlook, expectations are for Oregon’s relative income positions to hold steady in the coming years. The primary reason for this is that Oregon’s average wages have already accelerated in recent years, even as U.S. wages have recently picked up. Our office expects Oregon’s average wage to continue to increase by 4 percent per year. However as the U.S. accelerates closer to Oregon’s annual rate, Oregon’s growth advantage in recent years will lessen.

Note that our office previously looked at wealth, its sources and implications, and a deeper dive into home equity gains in the Portland area. It’s been a few years since we last wrote about estate taxes here on the blog, so stay tuned for an update on that in the coming weeks.

No need to bribe me for this edition of the Graph of the Week. That said, it is clear that every year of education pays off for individuals in the form of higher wages. Most of this is due to increased skills learned in the classroom and the types of jobs someone becomes qualified for. Although some of the gains are likely due to signalling, which is what economists call the fact that part of obtaining a college degree or completing a certificate program is that it signals to an employer that this person can work hard, operate on a schedule, and complete tasks which aren’t so much about technical skills as they are about soft skills and work ethic.

Given educational attainment is rising in Oregon (for both the Oregon-born and for in-migrants) this bodes well for future economic growth. The complicating factor of course is student loan debt which has risen in recent decades. The college graduate wage premium has declined some when examining age cohorts, but it does remain near historic highs. That said, it takes longer to repay the costs of college due to rising tuition and the like. And in a seemingly-good-news-but-is-really-bad-news way, student loan debt overall is growing slower. This, however, has to do with the fact that enrollments are down and not expected to pick up until the next recession. Regardless, individuals with more years of schooling on their resumes do earn higher wages in the labor market as seen in this edition of the Graph of the Week.

Posted by: Josh Lehner | March 20, 2019

Urban Wage Premium, Pacific Northwest Edition

New research from MIT’s David Autor has set the economics profession on fire in recent months. The reason is it furthers our understanding of the impacts of job polarization, wage stagnation and the implications this has on migration and the urban-rural divide. What follows is a summary of his new research through a Pacific Northwest lens.

A generation ago, workers of all stripes earned higher wages in large, urban areas. There was an economic incentive for individuals to move to cities. Workers responded accordingly and our metro regions have thrived.

This urban wage premium was largely about the types of jobs available. Urban areas contained most of the good-paying, middle-wage jobs as that was where businesses were headquartered and operated. As Autor writes:

“In the decades following WWII, there was a steep, positive urban gradient in the skill level and wage level of non-college jobs. Non-college urban adults disproportionately held middle-skill, blue-collar production and white-collar office, administrative, and clerical jobs. Because these workers labored in close collaboration with the high-skill, urban professional, managerial, and technical workers who oversaw factories and offices, middle-skill jobs for non-college workers were prevalent in cities and metropolitan areas but scarce in suburbs and rural labor markets.”

However, in recent decades there has been a decline in these types of jobs due to job polarization. As is well known, these changes have impacted traditional blue-collar, male dominated occupations like production — the manufacturing jobs that actually do the manufacturing. However it impacts women to the same degree due to the loss of office support jobs. These shifts can largely be traced to automation and technological change, however Autor notes that offshoring, erosion of bargaining power, falling real minimum wages, and the fissuring of the workplace also play a role.

The problem with job polarization is not just the loss of a middle-wage job, it’s when that worker is unable to land a similar paying job in its place. Autor’s research finds that “almost all occupational change among non-college workers reflects a movement from the middle toward the bottom of the occupational distribution.” This is in-line with what we found HERE and HERE in Oregon as well. These adjustments are disheartening as most Oregonians either end up taking a low-wage job or drop out the labor force entirely (1/3 of women, up to 2/3 of men). Autor writes that this process depresses wages in two ways. First, by taking a low-wage job, a worker simply earns less. Second, the labor pool is larger and as the supply of potential workers outstrips demand, the price (wage) falls.

The result is that workers today without a college degree perform the same tasks in urban areas as they do in more rural areas. As such, they are paid the same relative wages. A high school graduate working in Pendleton or Sequim earns the same as their counterpart in Portland or Seattle. There is no longer an urban wage premium for workers without a college degree. All of this before housing and the cost of living are taken into account.

Note: The data are based on PUMAs and the horizontal axis shows population on a log scale. Neither of these are intuitive. But as you move left to right on the horizontal axis you go from rural areas to urban ones. For some context, all of Eastern Oregon and Eastern Washington (ex Tri-Cities and Spokane) are in the 1-3 range. Boise, Eugene, and Medford are around 4. The Portland and Seattle areas are 5+.

So what are the implications of these changes to the economy and will these trends reverse?

Well, without a financial incentive, workers without a college degree will continue to move to urban areas less frequently. This reduces the relative labor supply in cities, placing more pressure on firms looking to fill low-wage jobs. In the past year or two we have seen a big rise in employment rates for individuals with a high school diploma or less and wages are rising the fastest at the lower end of the spectrum. Conversely this shift raises labor supply in smaller metros and rural areas, supporting stronger overall growth in these locations.

This sorting by job opportunities, educational attainment and the like is not complete, but is ongoing. The combination of high housing costs and low wages, or low-wage opportunities drives much of it. The economy is searching for a new equilibrium. As Marginal Revolution‘s Alex Tabarrok points out some of these changes are endogenous. That is, firms who do not have be located in expensive urban areas have located elsewhere, hence some of the decline. Autor points this out as well and highlights that manufacturing jobs have shifted out of cities into suburbs and other areas as transportation networks improved. But for now these trends point toward young college graduates continuing to drive population growth in Portland and Seattle, while the other regions in the Pacific Northwest should see more balanced gains.

Finally, I must note that Autor himself calls for further research into these processes and findings. He provides strong evidence of the likely dynamics behind these trends, but does not say this is the only possibility. In particular an occupation is not a labor market. Urban areas are not truly independent of rural ones. Everything is interconnected. Just because demand for one type of work or in one location declines, it does not necessarily mean it hampers trends across the entire economy. Given how relevant this research is to many different policy areas, I suspect we will see lots of papers fleshing out this research in the coming years.

Bottom Line: Obviously we, as a society, have know about some of these dynamics for a long time. What is new is how Autor combines these insights to look at how job polarization and geography meet, overlap, and intertwine. What he finds is highly informative and can largely explain big picture trends in recent decades. As such, the research is also depressing. The good news is that a strong economy does work wonders, even if does not cure all ills. Job polarization is most evident in recession. During expansions, middle-wage jobs do grow, particularly those driven by population gains, but they do not fully regain their share of the labor market.

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